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Employer debt - proposed changes

Draft regulations have been issued proposing changes to the way in which employer debts are calculated and apportioned in DB schemes on an “employment-cessation event”, i.e. when an employer in a multi-employer scheme ceases to have employees in a category of employment to which the scheme relates at a time when other employers still have active members. The stated intention of the changes is to frustrate any attempts to use apportionment as a method to abandon a scheme whilst retaining its flexibility for employers in corporate transactions and restructurings. The changes also aim to surmount some of the difficulties posed by the limitations on the powers of the Pensions Regulator in relation to approved withdrawal arrangements (AWAs).

The amendments are intended to come into force some time in December 2007 and will affect events taking place on or after that date. Money purchase assets and liabilities are expressly excluded and employers of members with only money purchase benefits are excluded from the definition of “employer”.

The amendments generally affect only multi-employer schemes with the exception of changes to the calculation of assets and liabilities, which will affect all s75 debts: broadly, assets will be determined, calculated and verified by the trustees after consultation with the auditor and liabilities by the trustees and actuary based on the actuary’s estimate of the cost of purchasing annuities.

A key change is a new definition of employment-cessation event: this will occur when an employer has ceased to employ any active members of the scheme. The requirement that this be at a time when at least one other employer continues to do so has been removed. A debt will therefore be triggered immediately where all participating employers in a scheme cease to have active members simultaneously, for example if the scheme is closed to future accrual. A new provision allows a “period of grace” of 12 months from the employment-cessation event, where an employer, on ceasing to employ active members, may inform the trustees that it intends employing an active member within a 12-month period.

There will be five ways of dealing with the debt:

Liability share (the default position) - similar to the current position but with a different approach to assessing the liabilities attributable to each employer: broadly, an amount equal to the annuity buyout shortfall is paid

Scheme apportionment share - an agreement between the trustees and employer, made before or after any debt arises, as to the amount of the employer’s share of the debt; the trustees must be satisfied that the remaining employers will be able and willing to fund the scheme so that it will have sufficient assets to cover its technical provisions

Regulated apportionment share - an arrangement approved by the Regulator and the PPF, allowing an apportionment of a smaller amount of debt in order to avoid employer insolvency where that is likely to occur within the next 12 months

Cessation agreement - an agreement between the trustees, cessation employer and guarantors, entered into before or after an employment-cessation event, intended to offer a simpler alternative to AWAs and not requiring Regulator approval; the trustees must be satisfied that the remaining employers’ liability and willingness to fund the scheme is not adversely affected and that the guarantors have sufficient financial resources and, broadly, an amount equal to the statutory funding shortfall must be paid immediately and a guarantee entered into

Withdrawal arrangement - broadly similar to the current AWAs but with a change to the test for Regulator approval: instead of being satisfied that the debt is “more likely to be met” if the agreement is approved (which did not assist employers with a good covenant but low liquidity) the Regulator must be satisfied that it is reasonable to approve the arrangement, having regard to such matters as it considers relevant, including the potential effect of the employment-cessation event on scheme funding, the financial circumstances of the proposed guarantors, the amount of the cessation debt and the effect of the proposed arrangement on the likelihood that members will receive full scheme benefits.

Some of the proposed changes may well assist in easing difficulties encountered under the current regime but may also throw up new problems. There are likely to be further changes as a result of the consultation process.